"Land value tax can't be passed on to tenants" is often asserted by proponents of the tax, and theoretically this is true in a free market.
Oftentimes, however, the market is regulated.
This complicates things, and LVT-advocates would be wise to take this into account.
🧵1/11
In a free market, as Adam Smith noted, a landlord "acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground".
Furthermore, the "ground-rent" is unearned economic rent. J.S. Mill said it best: "Landlords grow rich in their sleep".
2/11
Note: "The rent of a house consists of two parts, the ground-rent, and what Adam Smith calls the building-rent. (...) The rent of the house itself, as distinguished from the ground, is the equivalent given for the labour and capital expended on the building." - J.S. Mill
3/11
When we tax land value, we tax the "ground-rent" and leave the "building-rent" (which is actually the return to maintenance and the structure, i.e. labour and capital).
If all of the ground-rent is taxed, landlords would become building managers rather than monopolists.
4/11
As supply of land (location) is fixed, landlords must pay the entire tax.
Tenants still pay the market rent, but landlords must hand over a chunk of it to the public treasury.
If we tax land value 100%, all of the rent paid by the tenant for the location is handed over.
5/11
Classical economists are very clear; Ricardo, J.S. Mill, and here Adam Smith:
"A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent".
Empirical evidence supports this.
gameofrent.com/content/can-lv…
6/11
However, things change when regulation enters the picture.
If rent is regulated, landlords are hindered from charging the market rent, and effectually the tenants receive part of the economic rent of land.
(Ignoring the effects of price control on "building-rent" here).
7/11
Denmark is a good example, where we have tight rent regulation as well as LVT.
The rent regulation law states: "If housing taxes falling on the property increase, the landlord can demand compensation for the expense through increase of rent".
8/11
retsinformation.dk/eli/lta/2022/3…
Now we're at the mercy of the wording of the law.
In this case, unlike in a free market, the tax can indeed be passed on – but only an amount equal to the economic rent previously given to the tenant by the regulations.
9/11
This has dire consequences for the prospect of increasing LVT rates, since advocates are not only up against the self-interest of owner-occupiers and landlords etc. but also have to contend with the (short-sighted) self-interest of regulated renters.
10/11
Two ways forward.
1. Make a trade-off which you can convince the majority will more than compensate for their loss. The classic example is lowered income taxes, but could also be e.g. land rent dividend.
2. Change the law so tax increases won't cut into regulated rent.
11/11
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